I am delighted to publish this guest post from my good friend and colleague Dr Stephen Thornton. Views expressed in this guest post are Stephen’s, and should not necessarily be attributed to me as well. GT

Blunt message to states from Canberra on recreational cannabis

Last week an Australian Senate committee released its report on Senator David Leyonhjelm’s private members bill to allow any State or Territory Government to legalise and regulate cannabis. The committee, chaired by Queensland LNP Senator Ian Macdonald and including Queensland Labor Senator Murray Watt, was told that cannabis use is less harmful than alcohol use and tobacco use, and that otherwise law-abiding recreational cannabis users were cast as criminals, which increases pressure on the criminal justice system and supports organised and violent crime.

Although I did not make a submission to the inquiry, in 2016 I undertook a preliminary examination of the likely economic and social benefits of legalising recreational cannabis use in Queensland [see here], prompted by its legalisation in a number of US states, which as of January this year includes California, one of the world’s biggest economies. My report found similar benefits to that identified by Senator Leyonhjelm in terms of economic and social benefits to government and consumers, specifically:

• The Queensland government could collect around $90 million/year in tax and fee revenue in the medium term with new jobs created and would realise significant savings in the budget in regard to decreased police, court and prison costs.
• Consumers, once purchasing cannabis on the black market and at risk of being fined and imprisoned with the associated police record and social stigma limiting their future job prospects, would realise significant benefits by purchasing from licenced premises and also in terms of product safety. Importantly, they would also financially benefit from lower transaction costs and via a consumer surplus as the scheme matured and the price of cannabis decreased in a competitive environment.

Costly cannabis arrests in Queensland (offset to some extent by fines) are the highest in Australia and have been since 2001-02. Queensland police in 2015-16 arrested 25,307 persons of the nearly 80,000 arrests in Australia and nearly as many as NSW and Victoria in total despite having around one-third of their combined population.

Number of cannabis arrests 1997-98 to 2015-16 (NSW, Vic, Qld & national total)

One aspect I didn’t cover off on in my report was the economic relationship between the now legalised medicinal cannabis market and a future recreational use market. This year, a medicinal cannabis farm was approved by Brisbane City Council (see article here) while Australia’s first licenced medicinal cannabis producer Medifarm with its grow facility located on the Sunshine Coast recently asked the Palaszczuk Government for funding to build a Centre of Excellence at the University of the Sunshine Coast, which reportedly could create 500 jobs, attract $500 million in capital investment over 15 years and generate $1 billion in exports over five years.

The Senate report, which recommends that the bill not be passed, picks up on this point. It notes that it would drastically alter the Commonwealth’s oversight of medicinal cannabis production, manufacture and distribution which may lead states and territories to consider separate moves in regard to authorising cannabis and cannabis-derived products for medical and scientific use. In other words, the feds would lose control of their newly minted medicinal cannabis scheme.

Interestingly, but quite coincidentally, a Forbes article was also published last week which briefly explores how the two cannabis markets are not necessarily mutually exclusive given that people may purchase cannabis products in the recreational market for medicinal purposes, especially when the price of medicinal cannabis is significantly higher and when access to the drug is limited to certain medical conditions only, as is currently the case in Queensland.

The latest revenue projections for the US cannabis industry quoted in the Forbes article (in $US) shows a revenue decrease for medicinal cannabis from $5.9 billion in 2017 to $4.3 billion in 2018 and an increase in recreational cannabis revenue from $2.6 billion to $6.7 billion. However, the estimate for 2022 for the medicinal cannabis market is $7.7 billion which indicates the trend will not necessarily be downward, while the recreational market is expected to continue to expand to be worth $15.7 billion.

This is especially interesting as in the US recreational cannabis use at the federal level is still not legal, which has now created an environment of uncertainty with the change of President and the negative views towards cannabis of Attorney-General Jeff Sessions who has reversed the previous Obama administration’s ‘go easy’ on states which had legalised it.

Further north though, and after much planning and consultation, Prime Minister Justin Trudeau from 17 October will have implemented Canada’s national regulated recreational cannabis scheme which was a key plank of his policy platform for election in 2015 which takes a more health-focused and less commercial approach than many US states on things like plain packaging and advertising.

Although I was quite bullish when quoted in the Courier Mail saying that at least one of our governments by 2020 will be seriously exploring the benefits of legalising recreational cannabis on the back of what is learnt in North America, I still maintain that the push in Australia will likely come from one of our state governments rather than at the federal level, especially given the policy paralysis on other contentious issues like climate change. Canada will be the country to watch both in terms of economic and social outcomes, as I expect any scheme introduced here to take a similar health-focused approach.

Dr. Stephen Thornton is a social economist and principal of BG Economics.